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Book part
Publication date: 21 November 2014

Alex Maynard and Dongmeng Ren

We compare the finite sample power of short- and long-horizon tests in nonlinear predictive regression models of regime switching between bull and bear markets, allowing…

Abstract

We compare the finite sample power of short- and long-horizon tests in nonlinear predictive regression models of regime switching between bull and bear markets, allowing for time varying transition probabilities. As a point of reference, we also provide a similar comparison in a linear predictive regression model without regime switching. Overall, our results do not support the contention of higher power in longer horizon tests in either the linear or nonlinear regime switching models. Nonetheless, it is possible that other plausible nonlinear models provide stronger justification for long-horizon tests.

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Essays in Honor of Peter C. B. Phillips
Type: Book
ISBN: 978-1-78441-183-1

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Article
Publication date: 7 August 2007

Apostolos Serletis and Periklis Gogas

To test the Feldstein‐Horioka hypothesis that the investment‐to‐output ratio moves one‐for‐one with the saving‐to‐output ratio, suggesting international capital mobility.

Abstract

Purpose

To test the Feldstein‐Horioka hypothesis that the investment‐to‐output ratio moves one‐for‐one with the saving‐to‐output ratio, suggesting international capital mobility.

Design/methodology/approach

The paper uses the econometric framework developed by Fisher and Seater, interpreting the Feldstein‐Horioka hypothesis as a long‐run phenomenon, and paying particular attention to the integration properties of the data, since meaningful tests critically depend on these properties. The paper also investigates the power of the long‐horizon regression tests, using the inverse power function of Andrews.

Findings

The paper tests the Feldstein‐Horioka hypothesis for 15 European countries, as well as for the USA and Japan, using annual data for the period from 1960 to 2002. Evidence is found against the Feldstein and Horioka hypothesis of low international capital mobility.

Originality/value

Although the findings are in contrast to those of Feldstein and Horioka, they are consistent with neoclassical growth theory according to which there is no reason to expect a relation between saving and investment if there are no barriers to capital movements.

Details

Journal of Economic Studies, vol. 34 no. 3
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 12 February 2021

Asif M. Ruman

Considering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the…

Abstract

Purpose

Considering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the unconventional monetary policy, given near-zero interest rates, affects future stock market performance. This paper analyzes the impact of the Fed's balance sheet size on stock market performance.

Design/methodology/approach

To analyze the Fed's balance sheet size's long-term stock market implications, this paper uses the asset pricing framework of market return predictability such as Ordinary least squares (OLS) and Generalized method of moments (GMM) analysis.

Findings

Findings in this paper suggest that the Fed's balance sheet size, deflated by asset market wealth, presents evidence of return predictability during 1926–2015 that is robust against standard controls. These results can be explained through the redistribution of risk and the wealth channels of monetary policy transmission. The changing balance sheet size of a central bank (1) affects systemic risk, yields and expectations and (2) signals the future direction of monetary policy and thus economic outlook.

Research limitations/implications

The main implication of these findings is that policymakers should avoid a severe imbalance between a central bank's balance sheet size and assets market wealth.

Originality/value

The empirical evidence in this paper documents a century-old relation between the Fed's balance sheet size and US stock market return using the Fed's balance sheet data for the last 100 years and stock market returns from the Center for research in security prices (CRSP) database.

Details

Journal of Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0144-3585

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Book part
Publication date: 13 December 2013

Todd E. Clark and Michael W. McCracken

This article surveys recent developments in the evaluation of point and density forecasts in the context of forecasts made by vector autoregressions. Specific emphasis is…

Abstract

This article surveys recent developments in the evaluation of point and density forecasts in the context of forecasts made by vector autoregressions. Specific emphasis is placed on highlighting those parts of the existing literature that are applicable to direct multistep forecasts and those parts that are applicable to iterated multistep forecasts. This literature includes advancements in the evaluation of forecasts in population (based on true, unknown model coefficients) and the evaluation of forecasts in the finite sample (based on estimated model coefficients). The article then examines in Monte Carlo experiments the finite-sample properties of some tests of equal forecast accuracy, focusing on the comparison of VAR forecasts to AR forecasts. These experiments show the tests to behave as should be expected given the theory. For example, using critical values obtained by bootstrap methods, tests of equal accuracy in population have empirical size about equal to nominal size.

Details

VAR Models in Macroeconomics – New Developments and Applications: Essays in Honor of Christopher A. Sims
Type: Book
ISBN: 978-1-78190-752-8

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Book part
Publication date: 26 April 2014

Panayiotis F. Diamandis, Anastassios A. Drakos and Georgios P. Kouretas

The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing…

Abstract

Purpose

The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing exchange rate behavior over the last 40 years. Furthermore, we test the flexible price monetarist variant and the sticky price Keynesian variant of the monetary model. We conduct our analysis employing a sample of 14 advanced economies using annual data spanning the period 1880–2012.

Design/methodology/approach

The theoretical background of the paper relies on the monetary model to the exchange rate determination. We provide a thorough econometric analysis using a battery of unit root and cointegration testing techniques. We test the price-flexible monetarist version and the sticky-price version of the model using annual data from 1880 to 2012 for a group of industrialized countries.

Findings

We provide strong evidence of the existence of a nonlinear relationship between exchange rates and fundamentals. Therefore, we model the time-varying nature of this relationship by allowing for Markov regime switches for the exchange rate regimes. Modeling exchange rates within this context can be motivated by the fact that the change in regime should be considered as a random event and not predictable. These results show that linearity is rejected in favor of an MS-VECM specification which forms statistically an adequate representation of the data. Two regimes are implied by the model; the one of the estimated regimes describes the monetary model whereas the other matches in most cases the constant coefficient model with wrong signs. Furthermore it is shown that depending on the nominal exchange rate regime in operation, the adjustment to the long run implied by the monetary model of the exchange rate determination came either from the exchange rate or from the monetary fundamentals. Moreover, based on a Regime Classification Measure, we showed that our chosen Markov-switching specification performed well in distinguishing between the two regimes for all cases. Finally, it is shown that fundamentals are not only significant within each regime but are also significant for the switches between the two regimes.

Practical implications

The results are of interest to practitioners and policy makers since understanding the evolution and determination of exchange rates is of crucial importance. Furthermore, our results are linked to forecasting performance of exchange rate models.

Originality/value

The present analysis extends previous analyses on exchange rate determination and it provides further support in favor of the monetary model as a long-run framework to understand the evolution of exchange rates.

Details

Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

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Book part
Publication date: 31 December 2010

Ricardo M. Sousa

Purpose – The purpose of this chapter is to assess the role of collateralizable wealth and systemic risk in explaining future asset returns.Methodology/approach – To test…

Abstract

Purpose – The purpose of this chapter is to assess the role of collateralizable wealth and systemic risk in explaining future asset returns.

Methodology/approach – To test this hypothesis, the chapter uses the residuals of the trend relationship among housing wealth and labor income to predict both stock returns and government bond yields. Specifically, it shows that nonlinear deviations of housing wealth from its cointegrating relationship with labor income, hwy, forecast expected future returns.

Findings – Using data for a set of industrialized countries, the chapter finds that when the housing wealth-to-income ratio falls, investors demand a higher risk premium for stocks. As for government bond returns: (i) when they are seen as a component of asset wealth, investors react in the same manner and (ii) if, however, investors perceive the increase in government bond returns as signaling a future rise in taxes or a deterioration of public finances, then they interpret the fall in the housing wealth-to-income ratio as a fall in future bond premia. Finally, this work shows that the occurrence of crisis episodes amplifies the transmission of housing market shocks to financial markets.

Originality/value of chapter – These findings are novel. They also open new and challenging avenues for understanding the dynamics of the relationship between the housing sector, stock market and government bond developments, and the banking system.

Details

Nonlinear Modeling of Economic and Financial Time-Series
Type: Book
ISBN: 978-0-85724-489-5

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Article
Publication date: 21 April 2011

Alan Gregory

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given…

Abstract

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the importance of the risk premium in regulatory cost of capital in the UK, this has important policy implications. There are three reasons why previous estimates could be upward biased. The first two arise from the comparison of estimates of the realised returns on government bond (‘gilt’) with those of the realised and expected returns on equities. These estimates are frequently used to infer a risk premium relative to either the current yield on index‐linked gilts or an ‘adjusted’ current yield measure. This is incorrect on two counts; first, inconsistent estimates of the risk‐free rate are implied on the right hand side of the capital asset pricing model; second, they compare the realised returns from a bond that carried inflation risk with the realised and expected returns from equities that may be expected to have at least some protection from inflation risk. The third, and most important, source of bias arises from uplifts to expected returns. If markets exhibit ‘excess volatility’, or f part of the historical return arises because of revisions to expected future cash flows, then estimates of variance derived from the historical returns or the price growth must be used with great care when uplifting average expected returns to derive simple discount rates. Adjusting expected returns for the effect of such biases leads to lower expected cost of equity and risk premia than those that are typically quoted.

Details

Review of Behavioural Finance, vol. 3 no. 1
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 29 May 2018

Daniel Liston-Perez, Patricio Torres-Palacio and Sidika Gulfem Bayram

The purpose of this paper is to test whether investor sentiment is a significant predictor of future Mexican stock market returns. It also estimates the dynamic…

Abstract

Purpose

The purpose of this paper is to test whether investor sentiment is a significant predictor of future Mexican stock market returns. It also estimates the dynamic correlation between investor sentiment and equity returns. Finally, it examines if investor sentiment innovations impact unexpected returns for a variety of portfolios.

Design/methodology/approach

This study utilizes predictive regressions to determine if sentiment can predict Mexican equity returns. Multivariate GARCH models are estimated to examine the time-varying correlations between investor sentiment and equity returns.

Findings

The results show that Mexican investor sentiment is a significant predictor of Mexican equity returns for up to 24 months ahead. The findings show that high levels of sentiment today are associated with lower equity returns over the near term. Furthermore, multivariate GARCH estimations indicate that the correlation between investor sentiment and equity returns is not static and varies considerably over time. Finally, the findings indicate that sentiment innovations are significantly correlated with unexpected returns, reinforcing the notion that unexplained sentiment fluctuations lead to unexplained changes in stock market returns. Overall, these results suggest that investor sentiment is a significant source of risk for the Mexican stock market.

Originality/value

This study seeks to further our understanding of how behavioral factors influence and predict Mexican equity returns.

Details

International Journal of Managerial Finance, vol. 14 no. 4
Type: Research Article
ISSN: 1743-9132

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Book part
Publication date: 21 November 2014

Yong Bao, Aman Ullah and Ru Zhang

An extensive literature in econometrics focuses on finding the exact and approximate first and second moments of the least-squares estimator in the stable first-order…

Abstract

An extensive literature in econometrics focuses on finding the exact and approximate first and second moments of the least-squares estimator in the stable first-order linear autoregressive model with normally distributed errors. Recently, Kiviet and Phillips (2005) developed approximate moments for the linear autoregressive model with a unit root and normally distributed errors. An objective of this paper is to analyze moments of the estimator in the first-order autoregressive model with a unit root and nonnormal errors. In particular, we develop new analytical approximations for the first two moments in terms of model parameters and the distribution parameters. Through Monte Carlo simulations, we find that our approximate formula perform quite well across different distribution specifications in small samples. However, when the noise to signal ratio is huge, bias distortion can be quite substantial, and our approximations do not fare well.

Details

Essays in Honor of Peter C. B. Phillips
Type: Book
ISBN: 978-1-78441-183-1

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Article
Publication date: 9 March 2010

Le Ma and Chunlu Liu

This paper develops a new decomposition method of the housing market variations to analyse the housing dynamics of the Australian eight capital cities.

Abstract

Purpose

This paper develops a new decomposition method of the housing market variations to analyse the housing dynamics of the Australian eight capital cities.

Design/methodology/approach

This study reviews the prior research on analysing the housing market variations and classifies the previous methods into four main models. Based on this, the study develops a new decomposition of the variations, which is made up of regional information, home‐market information and time information. The panel data regression method, unit root test and F test are adopted to construct the model and interpret the housing market variations of the Australian capital cities.

Findings

This paper suggests that the Australian home‐market information has the same elasticity to the housing market variations across cities and time. In contrast, the elasticities of the regional information are distinguished. However, similarities exit in the west and north of Australia or the south and east of Australia. The time information contributes differently along the observing period, although the similarities are found in certain periods.

Originality/value

This paper introduces the housing market variation decomposition into the research of housing market variations and develops a model based on the new method of the housing market variation decomposition.

Details

International Journal of Housing Markets and Analysis, vol. 3 no. 1
Type: Research Article
ISSN: 1753-8270

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